HRMC publishes further tax guidance on GMP equalisation
HMRC has published its third GMP equalisation guidance newsletter (the Guidance). The latest Guidance supplements HMRC's February 2020 (annual allowance and lifetime allowance) and July 2020 (lump sums) newsletters on removing inequalities resulting from guaranteed minimum pensions following the three Court judgments in the Lloyds case (see here and here for a summary of the two main judgments (Lloyds (1) & (3)).
The Guidance covers tax issues relating to historic transfers out and certain aspects relating to GMP conversion. We cover the key points below.
Transfers – payments of a top-up transfer amount and a lump sum
The High Court in Lloyds (3) ruled that historic cash equivalent transfer values must be revisited where the transfer value would have been higher if it had allowed for GMP equalisation with any top-up payment being made to the receiving arrangement that accepted the original transfer.
However, this could raise issues, for example, where a receiving scheme is not able or not willing to accept a top-up or simply no longer exists. The court did not provide any comments in this regard but neither did it rule out alternative solutions being agreed between the member and trustees.
Lump sum payments
The Guidance helpfully confirms that "For GMP equalisation purposes, a lump sum payment made directly to the member may be possible". Any lump sum must meet the relevant payment conditions at the time of the payment for it to be an authorised payment - the relevant options for paying a lump sum will be a relevant accretion or small lump sum payment both of which have a £10,000 limit and a winding up lump sum which has a £18,000 limit.
Any top-up transfer payment made to another scheme must meet the conditions for a recognised transfer at the time the top-up transfer is made which means that it must:
- represent accrued rights, which it will deriving from rights to benefits under the transferring scheme;
- be made in connection with a member of the transferring scheme, which it also will with the member being treated as a 'deferred member' for tax purposes; and
- be made to a registered pension scheme or a qualifying recognised overseas pension scheme – it can be the same scheme as the one to which the original transfer payment was made or a different one.
The Guidance also covers taxation including annual allowance and transitional protections. As regards taxation, payments made to a member in respect of a right to a top-up transfer payment will be in relation to an uncrystallised right with the first 25% generally paid tax-free.
GMP conversion is one of the methods which can be used to equalise GMPs. The Guidance assumes that any post-conversion benefits will have the same or 'virtually the same' actuarial value as the pre-conversion ones.
Members who have not retired or deferred members
The Guidance notes the likelihood of there being annual allowance impacts in the tax year of conversion and in the following years up to retirement. HMRC need to complete additional work on this to arrive at an appropriate 'outcome and treatment'.
Deferreds could also lose fixed protection and schemes looking at using GMP conversion should consider the tax implications for these members.
The Guidance confirms that where GMP conversion is used for pensioners, there should be:
- nothing to test in respect of the annual allowance;
- fixed protection should not be lost if all benefits in the arrangement have crystallised; and
- a test against the lifetime allowance could be triggered as a benefit crystallisation event (BCE 3) if the pension increases above a permitted margin.
Members who left pensionable service before 6 April 2006
These members should continue to continue to remain outside the post A-Day tax regime provided they have remained outside of the annual allowance requirements since 6 April 2006 and their post-conversion benefits are actuarially equivalent to their pre-conversion ones.
HMRC is continuing to 'work through' GMP conversion tax issues and will provide further newsletter updates. The GMP Conversion Bill is also continuing its progress through Parliament – see our Insight.
TPO Early resolution service factsheet
The Pensions Ombudsman has published a factsheet providing guidance on the Early Resolution Service (the ERS) which the Ombudsman's office established when The Pensions Advisory Service's informal resolution services were transferred to it in April 2018.
The factsheet provides a useful outline of the ERS which will be of benefit to trustees that wish to understand the process more fully. We summarise the key points below.
Accepting a complaint through the ERS
The factsheet explains that upon accepting a complaint, the Ombudsman looks at whether it should be considered by the ERS or under the formal adjudication procedure. Generally, the ERS is for those complaints which the Ombudsman believes can be resolved informally with party agreement. Although a complainant does not need to have been through the respondent's formal complaint process (which for occupational pension schemes is the internal dispute resolution procedure) it must have been raised informally.
An ERS acceptance does not necessarily mean that the complaint will pass the full adjudication assessment process and there will be cases which do not pass either the ERS basic assessment or the fuller Adjudication assessment.
The complaint will be passed over to the Adjudication Team to formally investigate where informal resolution is not considered a possibility or if a party does not want to go through the ERS.
The ERS process
The ERS caseworker will advise on the complaint's merits and work with parties accordingly – this may involve providing an opinion as to what decision the Pensions Ombudsman might reach.
The ERS is not responsible for enforcing any agreed resolution – this is up to the respective party. The ERS does not have legal powers of determination or direction. A failure to honour the agreement can lead to review by the Adjudication Team.
Adjudication following the ERS
Any adjudication following the ERS is undertaken independently of the ERS process. If the complainant does not agree with the Adjudicator's Opinion, they can ask that the matter be referred to the Pensions Ombudsman who will again work independently of any previously expressed ERS opinion. Established facts may be taken into account but offers of resolution will not otherwise be taken as an admission of wrongdoing.
Trustees (and employers) may wish to direct relevant members to this factsheet at the appropriate juncture in any complaint process.